Warehouse Automation And Store Expansion Are Expected To Support Long-Term Beauty Retail Momentum

Catalysts

About Lyko Group

Lyko Group operates an omnichannel beauty retail platform with a growing portfolio of own brands and a presence across Nordic and selected European markets.

What are the underlying business or industry changes driving this perspective?

• The large warehouse automation investment that increases capacity by roughly 150% is now live and ramping. This may structurally improve delivery speed, reduce fulfillment cost per order and support operating leverage in net margins and earnings as volumes grow.
• Expanding a new, larger store concept that showcases a broader mix of hair, skin, makeup and fragrance responds to the resilience of physical beauty retail and rising brand awareness in Sweden. This may support higher revenue density per store and help stabilise group profitability.
• Scaling of Lyko’s community features, including short lived content formats and richer retail media opportunities for brands, deepens customer engagement and monetises traffic. This can potentially lift marketing efficiency, improve gross margin mix and support earnings growth.
• Growing traction in own brands, highlighted by viral campaigns and strong repeat purchase potential in consumable products, may increase the share of higher margin proprietary labels over time. This would support gross margin recovery and long term earnings expansion.
• More disciplined, country focused development in Europe, with Poland emerging as the growth engine, allows Lyko to balance top line ambitions with clearer paths to breakeven in non Nordic markets. This may improve the visibility of future revenue growth and reduce drag on group net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Lyko Group's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach SEK 138.0 million (and earnings per share of SEK 9.02) by about December 2028, up from SEK 54.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK180.1 million in earnings, and the most bearish expecting SEK108.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, down from 39.3x today. This future PE is lower than the current PE for the SE Specialty Retail industry at 23.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The heavy investment in warehouse automation and the associated term loan, amortisations and ramp-up costs may not be matched by sufficient volume growth. This could pressure net margins and limit earnings expansion.
• The planned rollout of up to 100 larger stores and potential entry into new countries could tie up significant capital in physical retail at a time when online penetration is still rising. This adds the risk of lower returns on invested capital and weaker group profitability.
• Ongoing difficulties in achieving a profitable business model in European markets outside the Nordics, despite Poland’s growth, could keep that segment operating near break even or at a loss. This would drag on group net margins and earnings.
• Reliance on aggressive own brand campaigns and heavy discounting to drive traffic, as seen in the 75% off promotion, may structurally erode gross margins and condition customers to wait for promotions. This would limit sustainable revenue quality and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SEK134.0 for Lyko Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK157.0, and the most bearish reporting a price target of just SEK120.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be SEK5.2 billion, earnings will come to SEK138.0 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of SEK140.0, the analyst price target of SEK134.0 is 4.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.